Pricing and Patient Access: Strategies and Negotiations

between Payers and Pharmaceutical Firms in the US

James C. Robinson Leonard D. Schaeffer Professor of Health Economics

Director, Berkeley Center for Health Technology University of California, Berkeley

Overview

The problem, as viewed by payers Payer strategies The pharmaceutical arms race Negotiations

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Payer Responses to Rising Prices

1. Formulary exclusion 2. Mandated discounts 3. More stringent management of use 4. Changed physician payment incentives 5. Increased consumer cost sharing

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1. Private Payers Deny Coverage for Some Drugs to Obtain Rebates on Others

High pharmaceutical revenues have stimulated R&D and a full pipeline of innovative new drugs

Many specialty therapeutic categories have multiple drugs with some interchangeability Hep C, rheumatoid arthritis, multiple sclerosis, melanoma, NSCLC…

Private insurers and PBMs deny coverage for one or more drugs in a category in order to obtain rebates from the other drugs in the category Gilead reported average 46% rebates for Sovaldi, Harvoni

Increased divergence of published and paid prices

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2. Public Programs Deepen and Broaden Mandated Price Discounts

Medicaid ‘best price’ discount deepened to 23% with further reductions if firms have imposed price increases after launch

340B discount (similar to Medicaid) has been extended to 45% of hospitals and numerous clinics

Proposed extension of Medicaid discount for low-income Medicare beneficiaries

Proposed reference pricing (Least Cost Alternative) for specialty drugs by Medicare

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340B Discounts to Reach $13.4B by 2016

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3. Private Payers Increase Management of Utilization for Expensive Drugs

Private payers impose requirements on physicians seeking to prescribe/administer expensive drugs, even for drugs that are included in the formulary Prior authorization: physician must submit request to payer

documenting appropriateness of the patient for the drug Step treatment: physician must first prescribe payer’s preferred drug

(e.g., cheaper alternative) and only move to more expensive drug if patient does not respond or experiences toxicity

These utilization management programs are now being applied to a wider range of drugs and are becoming more stringent

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Prior Authorization is More Stringent and Coverage Exclusion More Common. Example: Rheumatoid Arthritis

Degree of management Is Increasing

Drug Covered, No PA Required

Less Managed

• Any of the requirements not listed under Moderately, Highly, or Bio Managed

Bio Managed 1

• Requires prior failure or contraindication with 1 biologic therapy

Bio Managed 2

• Requires prior failure or contraindication with 2 or more biologic therapies

Drug Not Covered

Moderately Managed Any of the following

• Specialist approval required

• Requires prior failure or contraindication with 1 DMARD (e.g., MTX)

• Requires prior failure or contraindication with 2 conventional therapies (e.g., NSAIDs)

• Initial authorization time limit >3 months but <6 months

Highly Managed

Any of the following

• Requires prior failure or contraindication with 2 or more DMARDs

• Requires prior failure or contraindication with 3 or more conventional therapies

• Requires prior failure or contraindication with 1 DMARD AND 2 conventional therapies

• Severe RA only

• Initial authorization time limit <3 months

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4. Public and Private Payers Create New Physician Payment Methods in Oncology

Major payers are offering oncologists a monthly per-patient fee to cover care management services This directly (United, CMS) or indirectly (Aetna, Anthem) discourages

use of costly office-administered biologics

Some payers are offering bonus (shared savings) if oncologists reduce total spending below targets Reward for reduction in infused and patient-administered drugs as well

as ED visits, hospitalization

CMS has announced plans to adjust spending target for new drugs, but only if they are used on-label, at rates not exceeding market, and if the drugs are ‘cost-effective’

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Population-Based Payment: Pricing Clothes by the Kilo

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5. Public and Private Payers Increase Patient Cost Sharing

Employers are increasing annual deductibles for medical services (including office-administered drugs) and coinsurance for ambulatory drugs

Individuals purchasing coverage through ObamaCare insurance exchanges are favoring products with high cost sharing (and low premiums), with subsidies for low income persons

Medicare Part B requires 20% coinsurance for office-administered drugs and Part D requires 25-40% coinsurance for ambulatory drugs, with subsidies for low-income seniors

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Employers Move to High-Deductible Health Plans

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Individual Consumers Favor High-Deductible Silver and Bronze Plans in ACA Insurance Exchanges

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Pharmaceutical Firms are Responding to the New Payer Initiatives

Larger clinical studies to support coverage (more endpoints, subpopulations, head-to-head trials, observational studies)

Mobilize patient advocacy organizations to resist prior authorization

Physician office support (for prior authorization) Consumer copay support programs Payers respond by intensifying their initiatives This ‘arms race’ increases administrative costs,

demonization, litigation, and regulation

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Is There Hope for Negotiations?

The era of unchallenged ‘free pricing’ by drug firms is finished, due to pipeline of therapeutic options

Payers are negotiating with drug firms for price rebates and conditions of use

Drug firms are negotiating for reductions in access barriers for patients

Negotiations between individual payer and drug firms offers interesting possibilities, but imposes high transaction and publicity costs

Is there a possibility of collective agreements?

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What Does Each Side Really Want?

What do payers want from manufacturers? Launch price benchmark set at affordable level Launch price for each drug adjusted for clinical and social value Post-launch price increases linked to increases in value

What do manufacturers want from payers? Faster coverage and limits on prior authorization Fewer mandated discounts Less consumer cost sharing

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What Do Payers Want?

1. Launch price benchmark Despite all the talk about ‘value-based pricing’, the essence of payer

views of value-based launch price is the benchmark against which prices for individual drugs are set

What is the number?

2. Launch prices for individual drugs Prices for individual drugs are set relative to the benchmark, based on

their comparative value to the patient and to society Which are the criteria for comparison?

3. Post-launch prices increase only if value increases How do we define/measure value increases?

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1. Benchmark for Value-based Prices

The acceptable (‘value-based’) price for any one drug will be determined relative to a benchmark

Value to the patient (cost-effectiveness threshold) NICE chooses $50K/QALY ICER & Abacus choose $125K/QALY

Affordability to society (budget impact) ICER adds another component to the price benchmark. The price is

reduced from the ‘value based’ price if spending on the new drug (price times volume) would imposes incremental costs to payers that would outstrip the rate of growth of the national economy

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Example: ICER

Source: Institute for Clinical and Economic Review, “Evaluating the Value of New Drugs and Devices” (2015)

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2. Launch Prices for Individual Drugs

Value to the patient Comparative clinical efficacy Comparative toxicity Mode and ease of administration

Value to society Novelty (reward for innovation) Well-developed evidence (reward for extensive testing for safety etc.) Targets priority population (e.g., children, disadvantaged) Rarity (drugs targeting orphan conditions need high per-patient price) Public health (reward drugs that reduce disease transmission)

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Source: http://www.drugabacus.org

Example: DrugAbacus

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Source: http://www.drugabacus.org

DrugAbacus in Action

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3. Price Increases After Launch

Some EU nations (e.g., France) mandate annual price reductions, regardless of changes in value

In US, many firms impose annual price increases, regardless of changes in value

Under value-based pricing, price changes (up or down) reflect new evidence of value Value to the patient: efficacy, toxicity, etc. Value to society: novelty, rarity, etc.

If there is no change in value, the price of a drug would change at rate of CPI

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What Do Pharmaceutical Firms Want?

1. Faster and more transparent coverage decisions Insurance coverage issued promptly after FDA authorization Coverage decisions based on clear and consistent criteria

2. Fewer physician prescription barriers Prior authorization limited to ensuring appropriate use Transparent and evidence-based physician payment programs

3. Fewer patient access barriers Lower cost sharing

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Negotiations between Payers and Pharmaceutical Firms

Payers and pharmaceutical firms currently are negotiating new prices based on new formulas:

Value to the patient and to society Comparative clinical and cost effectiveness Intermediate outcomes for individual patients

Relief from payer obstacles to patient access Formulary inclusion First line or other favored placement with respect to prior authorization

In future, these negotiations could extend to: Inclusion in favored pathways for physician reimbursement Reduced consumer cost sharing

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Limits to Negotiations between Individual Payers and Drug Firms

Negotiations between individual payers and drug firms can create fruitful agreements and links between price and performance

But they extend the ‘arms race’ Drug firms increase prices at launch and afterwards, so as to offer

rebates from a higher base Public payers demand broader and deeper mandated discounts Private payers tighten formulary coverage criteria, prior authorization,

physician payment incentives, and consumer cost sharing so as to have something to trade for more rebates

Administrative costs are high, transparency is zero Patients are caught in the middle

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Industry Standards of Conduct?

There may be a role for collective agreements (standards of conduct) between associations of payers and drug firms over price and access. Individual firms could adhere on voluntary basis

Standards of pricing Criteria for launch prices Criteria for price increases after launch

Standards of patient access Criteria (evidence) for formulary inclusion Criteria for prior authorization and step therapy Criteria for physician payment (pathways) development Criteria for consumer cost sharing

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Conclusion The era of ‘free pricing’ in the US is passing Payers are tightening criteria for coverage and

reimbursement, management of use, physician incentives, and consumer cost sharing

Drug firms are pushing back Major debate over ‘value based pricing’ Increased public and private negotiations